RBI is buying the 10 year bond and selling short end bonds, an action that is termed as “Operation Twist”. Twist was done by the US Federal Reserve to bring down long term bond yields in order to keep long term interest rates down.
The 10 year government bond yield has shot up by almost 40bps from levels of 6.4% to 6.8% on RBI keeping policy rates status quo in its December policy review and on CPI inflation for November coming in at 40 months highs. RBI wants to prevent the 10 year yield from rising too fast and is undertaking the “Operation Twist”
The 10 year government bond yield fell by 13bps on the back of the RBI announcement. However, will the yields stay down? The government is steadily issuing bonds and is likely to hit the markets with higher borrowing and this will continuously add supply at the longer end of the curve.
RBI buying bonds is keeping yields down artificially and this the markets will be wary of. RBI cannot buy bonds indefinitely and fiscal 2020-21 borrowing could be much higher than forecast.
CPI inflation too could stay pressured given Telecom tariff hikes, hike in automobile prices and many other products and services that are seen unviable at lower prices.
In short “Operation Twist” will only work temporarily.
RBI statement on Operation Twist – On assessing the current liquidity and market situation and evolving financial conditions, RBI announces a special Open Market Operation (OMO) Purchase and Sale of G-sec on 23rd December 2019.RBI is to buy Rs 100 billion of 6.45% GS 2029 and is to sell Rs 100 billion of 6.65% GS 2020(April 2020 maturity),7.80% GS 2020(May 2020 maturity),8.27% GS 2020(June 2020 maturity),8.12% GS 2020(December 2020 maturity). Opeartion twist will not have any impact on size of the RBI balance sheet.
The benchmark 10-year bond, the 6.45% 2029 bond, yields declined by 19 bps to 6.60% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield came down by 21 bps to 6.43% and the 6.68% 2031 bond yield decreased by 24 bps to 6.92%.
One-year OIS yield declined by 1 bps to 5.28% while the five-year OIS yield decreased by 5 bps to 5.45% on a weekly basis.
System liquidity as measured by bids for Repo, Reverse Repo, Term Repo and Term Reverse Repo in the LAF (Liquidity Adjustment Facility) auctions of the RBI and drawdown from Standing Facility (MSF or Marginal Standing Facility) was in surplus of Rs 1779.9 billion as of 20th December 2019. Liquidity was in a surplus of Rs 2870.98 billion as of 13th December 2019.
Weekly G-sec Curve Spread Analysis
- On the run yield curve remained steady at the shorter end and steepened at longer end last week. (Table 1)
- Off the run bond yield curve movement steepened at the shorter end and flattened towards the longer end as compared to the previous week.
- On 17th December, the SDL spread with 10-year G-sec stood at 54 bps, 9 states borrowed Rs 95.50 billion through SDL auction. On 10th November, the spread between SDL with 10-year G-sec stood at 55 bps.